It doesn’t look wise to lock in your mortgage at 4.75% or more

Turning points can often be challenging when managing your personal finances. And no more so than in the important area of mortgage rates. With the European Central Bank having announced no change in its base rates at Thursday’s March meeting, there is a bit of a phoney war going on about when it will actually move. But inflation is falling, interest rates have peaked and, at some stage this year, they are going to start falling.

The rest of 2024 and into 2025: There has been a bit of a tug of war between the markets and the ECB over expectations for the year. As of now, market interest rates point to a cut of a bit more than 0.75 of a point by the end of the year. The chief executives of AIB and Bank of Ireland both speculated recently that the cut this year could be a bit larger at 1.25 percentage points, bringing the ECB’s deposit rate, now 4 per cent, down to 2.75 per cent.

Economists debate what interest rate would be neutral – neither stimulating nor holding back the economy. The ECB deposit rate, now 4 per cent, might fall to, perhaps, 2 per cent in time. But it will not return anywhere close to the minus 0.5 per cent level it was at before the increases started in summer 2022, barring some massive new economic downturn. Mortgages in future will cost less than they do now, but more than they did in the years between the financial crash and the pandemic.

Broker John Fahy of Pangea Mortgages feels there might be a cut of about 0.5 points in rates on offer to borrowers as the year goes on. The best fixed rates in the market at the moment are green rates from lenders such as AIB, Haven and EBS at 3.65-3.75 per cent for four to five years, but Fahy does not see offers going below 3 per cent. of below 60 per cent, which might help some mover purchasers carrying forward some equity from their previous home.

In the context of a downward move in interest rates – and of lower rates of about 4 per cent already on offer from some smaller lenders such as Avant – these look to be high rates to lock in at. There is no one “right” answer in the current market. And there are already signs that borrower behaviour is changing. Barry points out that in the final quarter of 2022, 89 per cent of new mortgage loans were for terms of three years or more. In the last quarter of 2023 this had fallen to 72 per cent, with a significant rise in those going to one-year fixed products.

Source: Loan Digest (loandigest.net)

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